A R G U M E N T A O E C O N O M IC A N o 1 (1 0 )2 0 0 1 P L IS S N 1233 -5 8 35
J0rgen D rud H ansen
*Finn Olesen
* *EUROPEAN INTEGRATION: SOME ADAPTED FACTS
T he E u ro p ea n econom ic integration h as been an ongoing p ro c ess fo r nearly half a century. This article d iscu sses initially the c o n cep t o f ¡m ediation and then g iv es an overall assessm ent o f the d e v elo p m en t o f integration on v a rio u s areas. E vidence p o in ts to a rem arkable process tow ards m o n eta ry integration especially in th e last decades. The sig n ific a n t increase o f the intra- EU trad e also p o in ts to a more integrated E u ro p e especially since th e e stab lish in g o f the Internal M arket. H o w ev er, the integration -eem s to have less im pact on o th e r areas e.g. synchronization o f the b u sin ess cycles between M em ber S ta te s and convergence o f liv in g standards. Prospects for the future d e v elo p m en t o f integration is also discussed in the article.
INTRODUCTION
Is it fair to conclude that, in recent decades, as the economies of the M ember States have become m ore integrated so they now form one unified European economy? There is no im m ediate answer to this question, as there is no clear consensus concerning the meaning of the word integration. Loosely speaking, economic integration refers to a diversified process where form erly independent countries melt together to form a unity.
Econom ic integration may have at least two dim ensions. Firstly, the concept of integration can be related« io the degree o f convergence with respect to form al and institutional frameworks. It is obvious that the EU co operation has created such conditions for the econom ic environment in a number of central areas. For instance, The Internal M arket has made state borders less important. As a result of this, the institutional conditions for producers and consumers within the EU have becom e more uniform in several crucial respects. The Com m on Agricultural P olicy is another means whereby the EU has created a common institutional framework as the farmers in the EU all produce under the same set of m arket regulations. Finally, the EM U (European M onetary Union) gives the institutional setup in the m onetary area for countries participating in the com m on currency. So by this m easure similarity o f institutional and form al frameworks
-* C e n tre fo r E uropean Studies, U n iv e rsity o f Southern D enm ark, O d e n se U niversity
** D e p artm en t o f E nvironm ental an d B u sin ess Econom ics, U n iv e rsity o f Southern Denmark, Esbjerg.
integration has proceeded a great deal, and the EU m ust be said to be highly integrated.
Secondly, the concept of integration can be related to the degree of sim ilarity in outcome m easured, for example by uniform prices, interest rates, unemployment rates, and standards of living. These two aspects of integration - similarity in institutional and formal fram ew orks and similarity in outcom e - do not necessarily lead to the same conclusions with respect to the developm ent of the process o f integration.
T he complexity of the concept of integration is not the only hindrance to exam ining the effects of the EU process of integration because the removal of barriers also represents a global trend. Therefore, it is difficult to distinguish the specific effects of the European process from the global one.
G iven this complexity of the concept of integration the purpose of this article is to evaluate the present stage of integration in the EU on various areas. T he analysis will be based on adapted facts putting focus on trends of various indicators of degree of unification of European economies. The article furthermore aims to discuss future prospects for the integration process in future decades.
The paper is organized as follows. The integration experiences gained so far will be summaries in Section 2 trying to answer the question of whether the EU still consists of a club of economies or one fully integrated econom y. Section 3 takes a look into the future by examining recent initiatives and discussing the prospects for further integration. Finally, section 4 concludes the paper.
1. INTEGRATION IN EUROPE SO FAR
Giving an evaluation of the present stage of economic integration this could be done from a micro- as well as a macroeconomic perspective as shown in Table l.W e will expand further on the main findings of the table.
1.1. Markets for goods and services
The formation of the customs union and the Single M arket has as expected increased the intra-EU trade as shown in Figure 1. Also the trade between the EU and the rest of the world (extra EU trade) has increased over the years although admittedly at a much lower pace.
T able 1
R atin g o f the degree o f in teg ratio n
R ating C om m ents
M icro ec o n o m ic convergence:
a) M arkets for goods and services
T rad e ab le s +++ In ten se in tra -E U trade, nearly full
eq u aliza tio n o f prices.
P a rtly tradeables + In c re a sin g trade flows, som e
eq u aliza tio n o f prices.
N o n -trad eab les 0 By d e fin itio n no trade flow s, no
eq u aliza tio n o f prices. b) M arkets for factors o f production
L a b o u r m arket 0 N o m o b ility and hence no equalization
o f w ages.
M ark et for real capital ++ S om e m o b ility m anifested through FD I
flow s, m erg e rs and acquisitions -
eq u aliza tio n o f real profit rates.
M a c ro ec o n o m ic convergence:
c) N o m in al convergence
P ric e level ++ L a b o u r intensive non-tradeables
ch eap er in p o o r countries, hence not full eq u aliza tio n o f price levels.
In flatio n rates +++ In ten se in tra-E U trade and stable
e x ch an g e rates (especially the
in tro d u c tio n o f the euro) have lead to a co n v erg e n ce o f inflation rates.
N o m in al interest rates +++ M a ssiv e c ro ss-b o rd e r financial activities
in the fram e w o rk o f stable exchange rates h as lead to a convergence o f interest rates.
d) R eal convergence
B u sin e ss cycle synchronization + M e m b er sta te specific business cycles
b ecau se o f d ifferen t econom ic structures and lack o f c o -ordination o f fiscal policy.
U n em p lo y m en t 0 N o e q u aliza tio n o f em ploym ent because
o f c o u n try sp ecific business cycles and d ifferen t la b o u r m arket structures.
L iv in g standards + M ixed tre n d s o f convergence o f living
stan d ard s b e ca u se o f am biguous effects o f m o b ility o f goods and resources on spatial d istrib u tio n o f econom ic activity. N ote: R atin g o f integration acc o rd in g to outcom e, i.e. d e g re e o f equalization betw een M em b er S tates. Ratings from 0 (no in teg ratio n ) to full in teg ratio n + + + + + .
0
1960 1965 1970 1975 1980 1985 1990 1995 2000
Year Note: A v erag e o f exports and im ports in p e rcen t o f G D P
Figure 1: S h a re o f intra- and extra E U R 1 5 - trad e o f goods, 1963-99. Source: EU C om m ission (1999a). A nnex: T ab le 38, 39, 42 and 43.
Looking closer upon how the intra EU trade shares has developed between 1963 and 1999 one finds that all countries - Denmark excluded - have significantly increased their share. Quite according to theory the development in the degree of openness is bigger the smaller the country size as Figure 2 seems to indicate. 50 B/L <• • 1999 O 1963 0 4.-.. EL F 0 300 600 900 1200 1500 1800 2100
Note: A v erag e o f exports and im ports in p e rcen t o f GD P Figure 2: S h a re o f intra EUR 15 - trade o f g o o d s 1963 and 1999. Source: E U -C o m m issio n (1999a). A nnex: T ab le 5, 38 and 42.
The illustrated remarkable increase of trade intensities between the Member States has at the macroeconomic level strengthened the spillovers of aggregate demand. A t the microeconomic level the increased mobility of goods and services tends to equalize the individual prices for goods and services. However, the effect of trade liberalization on price differences varies a great deal from one item of goods to the other. More precisely, the decrease in price dispersion depends on the size o f transport and other trade costs after the elimination of tariffs and quotas. For those tradeables, where trade costs are low after liberalization, the price dispersion is similarly low. For non- tradeables, on the other hand, trade costs after liberalization are significant and, as a consequence, the markets are segmented. In this case, the formation of the customs union and the Internal M arket has only reduced price dispersion to a limited degree. The distinction between tradeables and non-tradeables applies to both goods and services. Figure 3 illustrates the development in the price dispersion between the Member States for private final consumption from 1985 to 1998. T he figure shows a clear decrease of price dispersion during the years where the Internal Market was established as price dispersion was reduced from about 22-23% in 1985 to about 16% in 1998.
c Q. 24 22 20 18 16 14 H 12 • • “i--- !--- 1---1--- 1--- 1--- 1---1---1--- 1---1--- 1--- 1--- 1---1--- 1 1984 1986 1988 199 0 1992 1994 199 6 1998 2000 Y e a r
Note: T h e figure shows the coefficient o f variance for prices o f c o n su m er goods between Member States. T he coefficient o f variance is defined by the spread divided by th e mean in the statistical distribution o f prices for consumer goods. Prices includes taxes (excise d uties and value added tax).
F ig u re 3: P ric e dispersion am ong M e m b er States, 1985-98 Source: E U C om m ission (2000).
To some extent it seems as if national markets have been replaced by a pan- European market. More competition on such a market improves the efficiency, or welfare, o f the economy, as price convergence limits the differences in the consumers’ marginal utilities o f the consumption of specific goods.
Furthermore, welfare will increase because the fiercer competition reduces the mark-up in the price formation.
However, Figure 3 also shows that a potential for further equalization of the price levels in Europe still exists. Surveys thus indicate that the geographic price differences are larger in the EU than in the USA, i.e., in general, the markets for goods and services continue to be less integrated in the EU than in the USA. A survey by the EU Commission based on price data excluding taxes thus shows that the dispersion of aggregate price levels for goods and services is 14% in the EU, but only 11% in the USA for 1996 (EU Commission (1999a), p. 217).
1.2. Markets for factors of production
Contrary to the markets for goods and services, the labour market, especially for unskilled labour, is much less integrated across the Member States. The mobility of labour across Member States has remained at a very low level leaving only marginal impacts on wage or employment dispersion. The reasons for this low mobility are mainly language and other cultural barriers which, by and large, have remained unaffected by the endeavours to integrate the EU economies into one economy.
However, indirect integration effects have appeared on the labour market. The integration of the goods market and the introduction of the euro have emphasized the need for a more flexible labour market. As a consequence, the national trade unions have demonstrated more caution in their wage demands, because dem and for labour in the national market has become more sensitive to wage claims, cf. EU Commission (1999) and Buti and Sapir (1998).
Foreign direct investment (FDI) and mergers and acquisitions have expanded rapidly in the 1980s and 1990s and intra-EU FDI flows have significantly gained importance (see eg. EU Commission, 1996). In some cases, where the mobility of goods is limited, the rationale for establishing subsidiaries has been to circumvent the distance barriers and use the owner specific advantages of the firm to have consumer production in more locations. In such cases, integration through foreign direct investment compensates for the lack of integration of the goods market.
Significant restructuring and specialization have taken place in European business. The home market oriented diversification strategies of individual firms have been replaced by strategies building on internationalization and development o f core activities. As underlined in an article in The Economist (2000), this has created a more competitive and dynamic environment in Europe, where company behaviour has changed from destructive caution to
creative destruction. The upsurge in capital flows - real as well as human - in the EU has therefore been a contributor to the economic integration of the Member States and specifically, it has served to speed up the diffusion of technological know-how.
1.3. Nominal convergence
At the macroeconomic level, integration has quite clearly left its mark. Most importantly, the monetary integration has led to a convergence of price levels, inflation rates, and interest rate levels between the M em ber States. The development in differences between the Member States with respect to inflation rates is illustrated in Figure 4.
Year
Note: T h e up p er and lower quartiles in d icate the annual rate o f inflation for the member countries w ith th e third highest and third lo w est rate o f inflation, respectively, in the specific year.
F igure 4: R a te o f inflation in the E U M e m b er States, 1980-99
Source: E U C om m ission (1999a), A n n ex : T ab le 24. A uthors’ c alcu latio n s.
The m iddle curve (EUR15), indicated by a solid line, shows inflation in the EU as a whole in the period 1980-99. This period was characterized by a fixed exchange rate co-operation between most Member States. The top (Max) and bottom (M in) curves give a year-by-year account of inflation in the countries with the highest and lowest inflation rates, respectively, and the distance between the two rates thus visualizes the maximum difference in inflation rates between the Member States. The curves of maximum and minimum inflation are, however, sensitive to exceptional events in individual countries. The figure therefore also indicates the development in inflation in the countries with the
third largest and third lowest inflation rates. These quartile curves offer a more informative picture of the actual inflation spread, as they exclude external countries. Statistically the two curves approximately delimits the upper quartile and the lower quartile, respectively, in the distribution of inflation rates between countries for the specific year. It appears from the figure that inflation in EUR 15 as a whole has decreased, and this is an expression of the increased emphasis on the objective of price stability; cf. the institutional setup of the European Monetary Union. Furthermore, the spread in inflation rates has visibly decreased throughout the entire period, and looking at this macroeconomic variable alone, integration has proceeded very successfully.
The nominal convergence, measured by the convergence of interest rates, is even more explicit. Differences in long-term nominal interest rates essentially reflect differences between the expected inflation rates of the member countries. Confidence in the feasibility of the European Monetary Union project significantly influenced the differences in interest rates throughout the 1990s. After the break down of the fixed exchange rate co-operation of the EMS following the two currency crises in 1992 and 1993, there were widespread scepticism concerning the realization of the European Monetary Union project, and as a consequence, there were huge differences in the exchange rate levels. This scepticism gradually disappeared concurrently with the political determination to realise the project from January 1, 1999 and compared with previous years, the differences in exchange rates were therefore reduced to a moderate level.
1.4. Business cycle synchronization
Whereas the monetary integration within the EU is obvious, the macroeconomic results of the process of integration concerning total output and employment are less clear. The economic development thus often differs between the individual member countries, especially in the short run. There is therefore a lack of synchronization of the business cycles between Member States. This fact has not changed markedly since the early 1980s as is shown in Figure 5 presenting annual real growth rates in GDP since 1980.
It is immediately apparent from the figure that the differences in growth rates vary a lot when the country with the strongest growth is compared with the country with the weakest growth in a specific year. A more precise picture of the real differences in growth appears by looking at the differences in growth rates for the upper and lower quartiles of the countries. The figure shows that there are significant differences between the upper and lower quartiles and the shown development does not indicate a greater synchronization in business cycles in the 1990s compared with the 1980s.
Year
N ote: T h e upper and low er q u artiles indicate the annual real g ro w th rate in GD P fo r the m em b er co u n tries with the third h ig h est and third lowest real g ro w th rates, respectively, in the specific year.
F ig u re 5: Real growth rate in G D P in the EU M em ber States, 1980 -9 9 Source: E U C om m ission (1999a), A n n ex : T able 10. A u th o rs’ calcu latio n .
At first sight, it may seem surprising that the developm ent in business cycles has not been better synchronized in recent years given the tendency towards a more extensive trade between M ember States in the last decades, see Figure 1. At the same time, exchange rates between most of the current members have been relatively stable as a result of their participation in the fixed exchange rate co-operation of the EMS. Under such macroeconomic conditions, there are strong links between the development in aggregate demand in individual M ember States.
A change in the aggregate demand in one country will lead to an increase in activity in the other countries, which in turn will lead to an increase in imports (and thus to export possibilities as well as higher activity in the other Member States). Extensive intra-EU trade under fixed exchange rates should thus contribute in a major way to increased synchronization o f the business cycles.
There may be various reasons for the lack of synchronization in the 1980s and 1990s. Firstly, there are still significant differences in industrial structure between countries, and similarly, the functioning of the labour markets differs from member state to member state. It is obvious that such structural differences may mean that economic development in individual countries will
not concur when external conditions change. Secondly, the economic policy of the individual Member States has been determined by internal considerations rather than by consideration of a co-ordination of the general development in business cycles in the EU.
Looking at differences in unemployment figures, there is no sign of a development towards more homogenous employment structures between the members. Figure 6 illustrates the differences in unemployment via a Lorenz curve in 1985 and 1998 for the current 15 Member States. The countries are ranked according to their rate of unemployment, and from left to right, the Lorenz curves display co-ordinates o f cumulated share of total unemployment and cumulated share of total labour force in EUR15. The curvature thus visualizes the inequality in the distribution of unemployment and it is apparent that the inequality has not changed substantially between 1985 and 1998. More precisely, the inequality is expressed by the Gini coefficient 0.11 in 1985 and 0.10 in 1998, i.e. in reality, the inequality is unchanged.
C u m u la tiv e share o f labour fo rce
Note: T h e co u n tries are ranked a cco rd in g to their rate o f unem p lo y m en t. T he Lorenz curve illustrates distrib u tio n o f unem ploym ent, i.e. the functional relatio n sh ip betw een the share o f unem ploym ent an d the share o f total lab o u r fo rce in the EU, when c o u n tries are ranked according to un em p lo y m en t rate.
F igure 6: U nem ploym ent in EUR 15, L o ren z curves, 1985 and 1998 S ource: E U C om m ission (1999b) pp. 127-142. A uthors’ calculation.
1.5. Real convergence versus price level developments
Although there has been significant differences in growth per capita, this has not lead to an equalization of the differences in standards of living between the individual member countries.
Figure 7 contrasts the development in real and nominal convergence measured in GDP per capita in PPS with price levels o f individual member countries from the mid-1980s until the end of the 1990s. In the case of perfect integration, price levels as well as real GDP per capita will be equal in all member countries, i.e. all economies will converge at the point (100,1). Hence, if the EU integration was perfect, it would be expected that the countries would move closer to the point (100,1) over time. As it appears from the figure, generally, the relative price level increases concurrent with the relative standard of living. This correlation between price level and standard of living is particularly due to the fact that the wage levels in the poorer member countries are relatively low and as a result, non-tradeables, and services in particular, are relatively cheap.
For six Member States (Portugal, Spain, Greece, Sweden, France, and Germany) there is a clear convergence with the EU level of both standards of living and price levels. Belgium diverges both with respect to standard of living and price level, whereas the picture is more blurred for the remaining countries.
G D P d e f la t o r
Note: T h e arrow s illustrates the change betw een the three year averages 1984-86 and 1997-99. The G D P deflator is calculated as the ratio o f G D P in euro and G D P in PPS. B = Belgium, DK = Denmark, D = Germany (1984/86 W est G erm any only), EL = Greece, E = Spain, F = France, IRL = Ireland, I = Italy, N L = The Netherlands, A = Austria, P = Portugal, FIN = Finland, S = Sweden, UK = United K ingdom (Luxembourg is unlisted).
F ig u re 7: C onvergence o f standards o f liv in g and price levels, 1 9 8 4 -8 6 and 1997- 99 S ource: E U C om m ission (1999a). A n n ex : T ables 5, 6, and 9. A u th o rs ’ calculation.
To sum up. The above has examined the question of whether or not economic conditions in the EU member countries have become more similar. It is evident that the countries have forged closer ties in the past 40-50 years. The creation of the customs union and the Single Market has stimulated trade between the countries and thus contributed to more uniform prices of individual goods. Similarly, in the monetary area, development has clearly been towards more homogeneous conditions with respect to inflation and interest rates, and the fixed exchange rate co-operation of the EMS, and later on the euro project, have been determining factors towards this end. With respect to synchronization of the business cycles, unemployment levels, and standards of living, there are still differences between the countries, and it is questionable whether integration really has progressed in these dimensions. The evidence points to the conclusion that the increased mobility of goods, services, persons and capital is no guarantee for a process of equalization of living standards as stated in neoclassical economic theory. As outlined in the theories of the “new” economic geography (e.g. Krugman, 1991) removal of barriers may stimulate centrifugal processes leading to divergence and a central-peripheral structure of economic activity.
2. PROSPECTS FOR THE EUROPEAN UNION IN THE YEARS AHEAD
In the following, we will look at current development trends in EU co operation as well as at the perspectives for development in the long run. Integration often in itself creates a need for further integration. This perception of integration as a politically dynamic process is the fundamental idea of neo functionalist political integration theory (Laursen, 1995).
There are several examples in the history of EU integration which support such a perception. The removal of the visible trade barriers, like tariffs and quotas, by the creation of the EU customs union led to an increase in various forms of invisible trade barriers, such as discriminatory public procurements, national technical standards, and abuse of the tax systems for national protectionism. This created a need for further integration, which in turn led to the creation of the Single Market. Unstable exchange rates are incompatible with the Common Agricultural Policy and may furthermore be perceived as a trade barrier in the Internal Market, as exchange rate insecurity hampers trade. Thus, both the CAP and the Single Market have created a need for stability in the exchange market; cf. EMS and later on the establishment of the European Monetary Union. It stands to reason to estimate future development from a similar procedural point of view. In the years to come, the following areas are,
formally or informally, on the agenda of the political decision makers of the EU:
1. Concerted efforts to improve employment in the M ember States. 2. Tax harmonization.
3. Enlargement of the European Union with several Central and Eastern European countries.
4. Reform of regional policy related to the structural funds. 5. Reform of the Common Agricultural Policy (CAP).
6. Institutional reforms of the decision-making process in the Union. In the longer time, discussions may possibly also include:
7. Reform of the welfare state, since, once implemented, the above steps might affect the existing welfare system, as extensive legal and illegal migration must be expected.
In EU co-operation, the task to lower the level o f unemployment has increasingly become more important. The concern about unemployment has been enhanced by the establishment of the European M onetary Union, which limited the autonomy of the M em ber States in drawing up an independent and individual national economic policy. As the European Central Bank is obliged to ensure price stability, EU co-operation of recent years has put an emphasis on a jo in t effort to increase employment. This had led to an incipient co operation on the labour market and employment policies. The obligation to co operate in this field is spelled out in the chapter on employment of the Amsterdam Treaty and subsequently elaborated on by a decision of the European Council in 1997 and by the Employment Pact, cf. EU Commission (1999b). Co-operation has, however, been rather sketchy so far. It has mainly consisted of exchanging information, making joint analyses, and issuing recommendations without limiting the competence of individual countries to carry out their own labour market and employment policies.
In the first instance, the objective of this co-operation is to increase employment and create a more flexible labour market. In the long run, the problem may turn out to be labour scarcity as a consequence of demographic development and the aim of the employment and labour market policy co operation will therefore also be to contribute to larger “employability”, i.e. increasing the job supply by increasing labour market association of individual generations.
There are similar dynamic policy spill-over effects into other areas. This applies to tax policy where the free movement of capital inside the Internal Market has created a need for harmonization of the taxation rules on the return on financial capital as well as on profits (corporate taxation). The geographic location o f firms and especially of financial investment is sensitive to
differences in taxation. Unless the taxation rules are harmonized, competition between countries in these areas will either lead to a reduction in the tax rates or result in distortions in the allocation of capital and tax revenue between the countries. Differences in excise duties and value added tax on consumption may also induce consumers to make their purchases in countries with the lowest taxation level. Although several members (e.g. the UK and Denmark) are reluctant to give up their national competence concerning taxation, there is nevertheless strong market pressure to introduce common regulations in the area. This pressure is enhanced by the increasing use of the internet for trade in goods which also calls for a solution at an EU level.
The most important, immediate challenge of EU co-operation will arise if the current accession negotiations between the EU and a num ber of Central and East European countries are completed successfully. In the first instance, Poland, the Czech Republic, Hungary, Slovenia, and Estonia are expected to obtain membership, but several other countries, such as Slovakia, Latvia, and Lithuania are expected to rapidly succeed. The desire for enlargement of the European Union is especially politically motivated. The admission of these countries will be the best bulwark against a renewed European political and economic split into an Eastern and W estern block.
The financial and administrative implications of the expected enlargement of the EU are, however, impressive. For instance the applicant countries have a substantially lower standard of living than the poorest of the current EU members, and this will create a need for massive support from EU structural funds. As several of the application countries are relatively large, measured by the size of the population, the fulfilment of this need may increase the requirements for EU expenditures on structural funds. It is unlikely that there will be political support to increase the total EU budget significantly, and the enlargement will therefore presumably lead to reforms of the principles governing the structural funds. Several countries which have received substantial support from the structural funds so far (Greece, Portugal, and Spain) are unlikely to be willing to accept that this support is redistributed to the advantage of the new, poor M ember States. This may therefore in future lead to a redistribution of the structural funds according to national quotas so that those countries which, to a certain extent, have received this kind of support so far will keep this advantage.
But the true hindrance of a swift enlargement might well be the need for reforms of the CAP and of the political decision making process. Poland has a large potential for agricultural production, and accepting Poland into the EU will therefore increase expenditures on CAP. This may mean that new members will only be included by the CAP after a long transition period and
concurrently with an enhancement of the efforts made so far of adapting the agricultural sector of the EU into the world market conditions.
Furthermore, it is likely that the political decision m aking process will be changed in the nearest future. Again, it is especially the impending enlargement of the EU with several new M em ber States which necessitates institutional changes. The aim of such reforms is to maintain a dynamic and effective decision making process in a future EU with more than 20 Member States. The considerations move in the direction of increasing possibilities of majority voting in the European Council of Ministers, and altering representation in the European Parliament, so that the number of members of Parliament from each country will reflect the size of the populations of the countries to a higher degree, as well as changing the rules for the rotation system regarding the chairmanship of the European Council of Ministers. In this connection it is possible that in future, groups of countries rather than individual countries will fill this post. There are also considerations of changing the practise of appointing the Commission. Up to now, the Commission has consisted of two citizens from each of the large countries (Germany, France, UK and Italy), and one from each of the remaining smaller countries. The persons in question are appointed by the Council of Ministers after prior nomination by the governments. If this principle, which is laid down in the Amsterdam Treaty, is maintained, the Commission will become unmanageably large. It is therefore under consideration to change the rules so that the sm aller member countries are not necessarily represented in the Commission. Also the so-called democratic deficit will be enhanced by the expected enlargement. This set of problems relates to at least three aspects. Firstly, it must be expected that in future the Parliament will be accorded more powers and decision making competence vis-â-vis the Council of Ministers and, perhaps in particular, the Commission, just as it must be expected that the num ber of seats in the Parliament will be reallocated in proportion to the given number of Member States and may be extended to include more than the current 626 members. Secondly, the political decision making process in the EU may be democratized by making it more open in line with what is applicable to the national parliaments of the members. Thirdly, the Commission has been criticized for being subjected to only a limited form of parliamentary control. Admittedly, the entire Commission as a body may be dismissed by the Parliament, as happened in 1999, but none of the Commissioners are subject to any actual ministerial responsibility.
Finally, it must be assumed that enlargement of EU co-operation will bring about the need for a reform of the bureaucracy with a view to simplifying the functioning of the EU system. Bearing in mind the integration efforts made so
far, such an organizational and administrative simplification may, however, prove to be a highly difficult task to solve in practise.
In the long run, enlargement may lead to an inclusion of the social welfare systems of the individual countries into the integration process. The free mobility of persons may cause extensive migration from the new, poor Central and Eastern European member countries to the richer Western European member countries. With the current social benefit regulations, the contribution of the migrant towards the production in the host country will be smaller than the wage and social benefits received by the migrant after tax. This will result in a welfare loss (Sinn 2000) of the current citizens in the host country. As the choice of destination country of the migrant in part will depend on wages and social benefits after tax, the individual country will have an incentive to offer the lowest social standards to make the country less attractive as a host country compared to the other member countries. Such competition between the members may lead to an erosion of the welfare state. In order to avoid such a development, and at the same time preserve the principle that a citizen of the EU enjoys the same rights everywhere in the Union, it stands to reason to harmonize the social standards of the member countries. Social policy may thus become a new object of integration.
The above discussion of the perspectives of the future development in EU co-operation illustrates the three dimensions of integration: functional scope, geographical domain, and institutional capacity (Laursen 1995). These three dimensions are illustrated in Figure 8.
Integration in functional scope consists of the transfer of policy areas from national decision making to decision making at an EU level. Integration in geographical domain captures the geographical dimension, i.e. the area where the rules of the integration apply. Finally, integration of institutional capacity represents the establishment of institutional bodies for monitoring the development and decision making at an EU Union level.
EU integration has progressed in all three dimensions in the past. Increasingly more areas have been submitted to decision making at an EU level. The formation of the customs union and the EMU constituted significant steps towards increased integration in functional aspect as each country transferred its national sovereignty in trade policy and monetary policy to an EU level.
In stitu tio n a l c a p a c ity
Figure 8: T h e m ultiface o f integration
Source: O w n adoption based on L au rsen (1995).
Integration in space has taken place as the number of Member States has increased from six in 1958 to fifteen in 1995. Also institutional capacity has been increased. The adoption of the Maastricht and the Amsterdam Treaty in particular, has delegated more decision making powers to the Council by limiting the cases requiring unanimous decisions. A new powerful institution has also appeared with the establishment of the European Central Bank.
The simultaneous integration in all three dimensions is hardly erratic but reflects linkages in the integration process, which may also appear in future. Integration of functional scope may lead to integration in the geographical domain. W hen the Internal Market was established, countries outside the EU got a stronger incentive to seek membership of the EU to get full access to this market. Similarly, if the euro project develops successfully, more countries will want to participate. A widening o f the EU with more members creates a demand for efficient decision making which points to the need for establishing more powerful, federal institutions instead of relying on intergovernmental co operation. Enlargement without securing an efficient decision making mechanism through a strengthening of the federal institutions may bring the integration process to a stalemate.
In a Union with many Member States, there may be opposing views on the future course of the Union, and especially disagreement on the degree of federalism. If the stalemate scenario is to be avoided, a possibility would be to
open up for membership at different layers, where some Member States are allowed to proceed into deeper stages of integration without committing all members to be involved. However, allowing for such flexibility has its costs, as it will contribute to a weakening of the EU institutions and confuse the decision making process.
CLOSING REMARKS
Returning once more to the main question of whether the European economies have evolved towards one European economy, the answer is yes, but there is still a long way to go before we can truly speak of one perfect integrated economy.
It is obvious that the economies of the EU M ember States have become more integrated in recent years. Monetary integration is particularly advanced as the differences in interest rates and inflation between the countries have been almost eroded. Looking upon the changes in total output and employment the results are less clear. There are still substantial differences in the level of unemployment and standards of living, and there are no definite signs that the development in business cycles between individual M ember States have become more synchronized. National characteristics have thus not been blurred, even if in a number of areas the economic differences between the member countries have decreased.
The antagonism between unity and diversity in the economic sphere still characterizes the European Union at the turn of the century. It makes sense to perceive Europe as one economy, but at a closer look, the individual economies of the M ember States are still discernible.
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